Southeast Asia: Confronting The Real Downside Potential

Business, China, Company Strategy, Economics, Europe, Indonesia, Malaysia, Olefins, Philippines, Polyolefins, Singapore, Thailand

PP3

By John Richardson

SOUTHEAST ASIA’S (SEA) economies can be divided into two main categories. These are the heavily export-exposed economies of Malaysia, Thailand, Vietnam and Singapore and the two countries with the biggest internal demand drivers – Indonesia and the Philippines. Next come the smaller emerging SEA economies with tremendous longer-term potential, such as Myanmar and Cambodia.

This division is the basis for the “moderate downside” forecast for the region’s polypropylene (PP) demand growth in 2017 in the chart above.

First, let’s start on the extreme left of this chart. The ICIS Supply & Demand database assumption for this year’s growth is that it will leave the region’s consumption at around 5.2m tonnes. This would represent simple average growth of 5.8% across all the major countries in the region (we estimate 2016 consumption at nearly 4.9m tonnes).

In the moderate downside, I have assumed that growth will be two percentage points lower in export-focused Malaysia, Thailand, Vietnam and Singapore. I have left growth in Indonesia and the Philippines unchanged. This would result in simple average growth of 4% in 2017 and consumption at around 5m tonnes.

This logic reflects the thinking of some economists and analysts who argue that it is only the heavily export-focused economies that will suffer from any global trade war in 2017 – and that the downside even for these economies will be very limited. They also assume that emerging economies such as Indonesia and the Philippines will be unaffected because they have big domestic markets.

In the case of Indonesia, exports contribute less than 30% to GDP growth whilst local consumption accounts for more than 60% of the economy. And with a population of 250m, the country is said to be home to an emerging middle class that will be more or less immune to global shocks.

Then there is the Philippines, where GDP is forecast to expand by as much as 8% in 2017. This is expected to be the result of high levels of government infrastructure spending, strong growth in domestic consumption and a booming business outsourcing sector.

You might therefore be tempted to use my moderate downside for PP as your worst-case scenario. Similar thinking might also lead you to accept equally modest downside scenarios for 2017 growth in other products and regions. But this would be entirely wrong.

We could quite easily see very low, or even negative, GDP growth in Malaysia, Thailand, Vietnam and Singapore as a result of the realisation of one or more the seven big global risks that I highlighted last Friday.

Indonesia and the Philippines would also not be immune from the impact of this year’s global recession. Both would suffer from major capital flight back to the US on a stronger dollar. The dollar looks set to strengthen further on US infrastructure spending and an investor flight to safety.

Weaker local currencies would also create inflationary pressures and thus dampen consumer spending across the whole of SEA.

We have entered an era of much-higher interest rates that will further raise global borrowing costs.  Indonesia, the Philippines – and also Thailand – have major public works programmes planned for 2017 designed to tackle infrastructure shortfalls. These programmes could become too expensive.

Benchmark 10-year interest rates have already doubled in the US since last summer and they have also trebled in the UK and doubled in Italy. I see this as only the beginning of higher rates.

Higher interest rates will switch the focus of lenders on to how we have too much global supply in manufacturing, not enough demand and far too much debt, making them very reluctant to lend to even the most credit-worthy.

I therefore see the third scenario for SEA PP – on the far right of my chart –as a strong possibility that has to be considered.

Here I see negative PP demand growth in Malaysia, Thailand, Vietnam and Singapore. Growth in other economies has been reduced by three percentage points from the ICIS Supply & Demand database assumptions. This would leave growth at a simple average of just 0.6% and consumption at around 4.8m tonnes – 53,000 tonnes less than in 2016.

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